A Guide to mortgage affordability
Mortgage affordability describes how a lender will calculate your potential borrowing when you are applying for a mortgage.
However, it’s important to bear in mind that the amount of money you earn is not the only factor that lenders will look at when it comes to deciding how much you will be able to borrow.
How is affordability calculated?
Mortgage affordability is determined by income and outgoings, the amount of deposit available, and the applicant’s credit score.
This, alongside the lenders own internal affordability calculator, which is affected by the type of property that you are purchasing and the type of mortgage you are applying for.
It is worth bearing in mind that lenders can increase or decrease borrowing for whatever reason they want, they do not have a legal obligation to lend you money and do not always need to explain their reasoning behind their decisions.
Why a 150,000 mortgage?
Given the average house prices and typical incomes, demonstrating the likely costs of a £100,000, £150,000, or £200,000 mortgage helps round figures up to give borrowers a clear idea of what's attainable.
As a £150,000 mortgage caters to many family homebuyers, it provides generic mortgage advice and a popular insight into the most-likely interest rates and size of monthly repayments. Using this example also allows mortgage brokers and lenders to explain the effects of poor credit history, the size of the deposit required, and how the loan-to-value ratio affects the interest rates.
Getting a mortgage with somebody else
Applying for a mortgage with somebody else such as a spouse or a friend can improve your chances of getting a larger mortgage as with most lenders, you will be able to use the total combined income.
A rough indication lenders use to work out your affordability, is based on a multiple of the total income of everybody who will be named on the mortgage. If you are buying a property with somebody else, the lender will combine your income to work out how much you might be eligible for.
How do mortgage payments work?
For most people, buying a property involves taking out one of the biggest loans you are likely to ever get, it’s important to understand how mortgage repayments work and your options for reducing them.
When you buy a property, in most circumstances, the purchase price will be covered by your deposit and the mortgage you borrow, obviously, this doesn’t apply to help to buy schemes or the right to buy schemes for example.
The larger your deposit, the smaller the mortgage amount you’ll need to borrow. For example, if you save up a deposit that is worth 10% of the purchase price, then you will need to get a mortgage for the remaining 90%. Also, the larger your deposit, the more likely you are to receive preferential interest rates, lowering your monthly payments.
Your mortgage repayment amounts will be determined by two further factors: the interest rate and the term of the mortgage. You make monthly repayments towards your mortgage so that when you reach the end of your mortgage term, it is repaid.
How much do I need to earn for £150,000 mortgage?
You might be wondering how much you will need to earn if you are applying for a £150k mortgage. Although this is based on several factors as each lender works differently with their own affordability models that are generally based on your income and expenses alongside other factors.
In general, the amount that you will be able to borrow will be determined by multiplying your annual salary. Most lenders offer between three or five times your income, while a few lenders offer up to six times your income. You can find various online calculators to help you work out how much you are likely to be offered and how much you can expect to pay per month.
It is worth noting that a mortgage repayment calculator provides a rough estimate and doesn't constitute financial advice. For the full picture, it's always better to speak to a mortgage advisor who can provide a decision in principle for you.
However, as a rough estimate, using the affordability model of 4x income, for example, you could get a mortgage of £150k if you are earning £37.5k per year.
How much a month is a £150,000 mortgage?
When it comes to your mortgage payments, there are two different things that you are repaying and paying – you repay the amount of money that you have borrowed, which is known as the capital, and you pay the interest that is charged on the loan.
These two sections that make up your monthly payment go towards the following:
reducing the size of the outstanding debt, this is the part of the payment that actually reduces the total amount of money you have outstanding with the lender.
This is essentially the lenders “fee” for lending you X amount of money over X amount of years, you pay this “fee” in the form of interest every single month with your normal mortgage payments.
As an extremely simplified example, assuming you have borrowed £150,000 for 25 years, and the interest rate remains at 3% for the whole 25 years of the mortgage, you’ll repay a total of £213,395.09 and your monthly payments will be £711.32.
In this example, the amount you will clear in capital on a £150,000 mortgage, is £150,000, however, the amount you pay in interest over the whole term of the £150,000 mortgage is £63,395.09.
When is the first mortgage repayment made?
You will make your first mortgage repayment the month after you complete the mortgage. Your lender will write to you to inform you of the exact date that the payment will be taken from your account.
Most lenders allow you to pick a date that is more convenient for you for your regular payments, so you can choose one that works best such as the same day that you receive your monthly salary.
Overpaying your mortgage
Most mortgage lenders allow you to overpay a certain amount – typically around 10% per year, without incurring an additional fee, different lenders have different policies on overpayments so it is worth checking with your lender or mortgage broker on where your mortgage lender stands.
If you can afford to overpay your mortgage, doing so makes a lot of sense, it allows you to clear the mortgage faster and save money on your interest payments.
Reducing your mortgage repayments
You may be able to lower your monthly mortgage repayments by extending your mortgage term.
For example, if you currently have a term of 25 years and extend it to 30, your monthly repayments will be reduced since you are now taking longer to clear the capital you have borrowed. However, this will increase the overall amount that you repay, as you’ll be charged more interest.
In our example of £150,000, over 25 years and an interest rate of 3%, increasing the term from 25 years to 30 years would increase the interest owed by an extra £14,271, resulting in a total of £77,666 that you would owe to the lender across the full term of the mortgage.